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AFIN808 Corporate Finance

Unit Code:

AFIN808

Unit Name:

Corporate Finance

Duration of Exam 

(including reading time if applicable):

2 hours ( plus 10 minutes reading time)

Total No. of Questions:

10 Multiple Choice & 8 short answer questions

Total No. of Pages 

(including this cover sheet):

15

 GENERAL INSTRUCTIONS TO STUDENTS:

  • Students are required to follow directions given by the Final Examination Supervisor and must refrain from communicating in any way with another student once they have entered the final examination venue.
  • Students may not write or mark the exam materials in any way during reading time.
  • Students may only access authorised materials during this examination. A list of authorised material is available on this cover sheet.
  • All watches must be removed and placed at the top of the exam desk and must remain there for the duration of the exam. All alarms, notifications and alerts must be switched off.
  • Students are not permitted to leave the exam room during the first hour (excluding reading time) and during the last 15 minutes of the examination.
  • If it is alleged you have breached these rules at any time during the examination, the matter may be reported to a University Discipline Committee for determination.

EXAMINATION INSTRUCTIONS:

Attempt all questions.

Part A (20 marks): Ten multiple choice questions. Answers must be recorded on a red-coloured Multiple Choice Answer Sheet which will be read by optical scanner. Use 2B lead pencils. Please enter your student number and name on this sheet.

Part B (40 marks): Four short quantitative problems. Answers to be placed in the space provided in this paper. Show all workings. Use an ink pen.

Part C (30 marks): Four short theory questions. Answers to be placed in the space provided in this paper. Use an ink pen. 

No part of this examination paper is to be taken from the examination room. 

AIDS AND MATERIALS PERMITTED/NOT PERMITTED:

Dictionaries:   Standard paper translation dictionaries may be used.

Calculators:    Non-programmable calculators may be used. No calculators with text retrieval capacity may        be used. Financial calculators may be used.

Other:              Closed book with specified material permitted:  One A4 sheet of handwritten and/or typed                           notes (double-sided) permitted.  To be collected with exam paper. 

Part A

Part B

Part C

TOTAL A+B+C

Problem

Multiple Choice

1

2

3

4

TOTAL

1

2

3

4

TOTAL

Value

20

10

10

10

10

40

9

9

6

6

30

90

Mark

                       

PART A: Multiple Choice (20 marks – 2 marks each)

Write answers on the separate multiple choice answer sheet.

Q1. According to CAPM, the cost of equity for a firm if the firm's levered equity has a beta of 1.2, the risk-free rate of return is 2%, and the expected market risk premium is 7%, is closest to: 

  1. 6%
  2. 4%
  3. 8%
  4. 8%
  5. 4%

Q2. A firm has EBIT of $1 million and borrowings of $10 million at an interest rate of 8%p.a. If the tax rate is 30%, according to Modigliani and Miller (with taxes), the company’s optimal level of debt would require additional borrowings of:

  1. $500,000
  2. $2,500,000
  3. $7,500,000
  4. $10,000,000
  5. $12,500,000

Q3. A 5-year warrant allows the holder to buy 100 of ABC Ltd’s shares at $24 per share. The shares are currently trading at $25. The current minimum value (lower bound) of the warrant is closest to:

  1. $0
  2. $1.00
  3. $24.00
  4. $25.00
  5. $100.00

Q4. XYZ Ltd has 2 million shares on issue trading at $8. XYZ Ltd seeks to acquire Target Ltd. Target has 2 million shares trading at $2 each. Synergies from the acquisition are estimated to be $1 million. If the acquisition is by share swap, the exchange ratio that XYZ Ltd should offer so that Target shareholders receive a $0.10 acquisition premium per share, is:

  1. 1 XYZ share for every 2 shares in Target
  2. 1 XYZ share for every 2.1 shares in Target
  3. 1 XYZ share for every 3.2 shares in Target
  4. 1 XYZ share for every 4 shares in Target
  5. 1 XYZ share for every 5 shares in Target

Q5. Which of the following is not usually considered a takeover defence:

  1. A tender offer
  2. A poison pill C. A golden parachute
  3. A staggered board
  4. A white knight

Q6. When we price a real option to expand (growth option), the role of the underlying share price in the Black-Scholes pricing models, is played by:

  1. The option delta.
  2. The value, at valuation date (t=0), of cash flows from the expansion project.
  3. The value, at the option exercise date, of the cash flows from the expansion project.
  4. The exercise price.
  5. The value of cash flows forgone.

Q7. The option to delay is likely to be more valuable than undertaking the project immediately, when:

  1. The NPV of doing the project immediately is significantly positive.
  2. Competition is high.
  3. The NPV of doing the project immediately is small or negative.
  4. The interest rate is low.
  5. Significant cash flow is forgone by delaying the project.

Q8. What is the impact of time to maturity on a put option?

  1. The longer the maturity, the less the option’s volatility.
  2. The longer the maturity, the higher the option price.
  3. The longer the maturity, the lower the option price.
  4. The longer the maturity, the higher the exercise price.
  5. There is no impact.

Q9. Which of the following is most correct about Private Equity (PE) finance?

  1. Ex ante finance (funding in advance of finding PE target investments) eliminates the likelihood of investing in bad deals.
  2. Private Equity firms typically target well-managed firms with uncertain incomes.
  3. Private Equity interests in new ventures are typically long-term.
  4. Management ownership interests in the PE target help reduce agency costs.
  5. Both A and D are correct.

Q10. Which of the following is NOT true about dividend payout policy:

  1. In practice firms seek to maintain a stable dividend payout.
  2. Special cash dividend payouts offer more choice to shareholders than share repurchases.
  3. Firms are reluctant to decrease the regular dividend.
  4. New capital raisings should not be used to fund dividends.
  5. Changes in dividends can be interpreted as a signal about the firm’s prospects.
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